Transcription
If you had invested $10,000 in gold at the start of 2025, that investment would now be worth more than $16,000. That's roughly a 60% gain in just 1 year, making it one of the fastest rises in decades.
And that might sound like good news, but billionaire investor Ray Dalio has argued that this surge in gold prices could actually be a warning sign for the economy. And that warning may be coming from this chart. It compares gold to the total money supply. Right now, gold's market value equals more than 170% of the US money supply. That's the highest level ever recorded, and historically, we've seen levels like this only twice before. Once in 1933 and once again in 1980. Both periods were followed by deep recessions and marked by a loss of trust in the monetary system, which makes today unusual as the economy still looks healthy. But gold is acting as if something beneath the system is starting to crack.
To understand this, let's go back to the last time gold dominated money like this. In the early 1930s, the financial system broke. Many banks failed, and the unemployment rate jumped from 3% to 25%, which means one in four Americans didn't have a job. People stopped trusting banks with their savings, and when trust in the financial system disappears, investors start searching for assets they believe will hold value. During that crisis, people flocked to gold as the most trusted store of value. And later, in order to fight the Great Depression, the US government changed its monetary policy entirely. In 1933, Americans were forced to hand in their gold to the government. And soon after that, the dollar was officially devalued by more than 40%. This led to the gold prices jumping overnight from about $20 to $35 per ounce, meaning the currency lost its purchasing power while gold retained its value. That's when people stopped trusting money, and gold effectively became money again.
The same pattern appeared again in the 1970s when inflation surged to nearly 14%. Savings started losing purchasing power, and that's when investors fled to safe haven assets like gold. This led to gold prices surging about 20 times between 1970 and 1980. But that surge in gold also marked the end of the cycle. Once inflation was brought under control, gold prices fell nearly 60% between 1980 and 1985. So history shows a clear pattern. Gold tends to dominate when the confidence in the monetary system weakens and capital starts flowing towards hard assets that people trust.
But here's what makes today different. We're not in a depression, and inflation is nowhere near the levels seen in the 1970s. So if the economy still looks relatively stable, what is actually driving gold prices higher today? To understand the move on gold, we need to look at the money supply. M2 is simply money people can quickly access and spend, which includes cash and bank deposits. After the 2020 pandemic, central banks printed trillions of dollars through quantitative easing to support the economy. And as liquidity increased, all assets, including stocks, crypto, housing, and gold, surged. But even though the growth in money supply slowed after 2022, recently it has started rising again, which means the financial system is still flooded with liquidity. And a large part of that liquidity is being used to support government debt.
For years, US government debt has been rising steadily, and today US debt stands at more than $38 trillion. Now take a look at the orange line, which shows the total market value of gold. For the past two decades, debt grew much faster than gold. But recently, something has started to change. Gold has surged sharply, and with this surge, its total market cap is now approaching $38 trillion, almost the same size as US government debt. This is a major shift, which tells us that investors and institutions are now increasingly allocating towards hard assets instead of paper assets. And we're already seeing that shift happening. Gold fund inflows since 2020 is roughly $127 billion. Nearly $120 billion of those inflows happened in the last year itself. This shows capital is actively moving into gold.
However, when we look at how much gold investors actually hold today, the number is surprisingly small. Even after this rally, gold represents only about 0.17% of US privately held financial assets, which means investor demand alone doesn't fully explain this move. And when we look at who else is buying gold aggressively, one group stands out, central banks. Central banks around the world have been buying gold at the fastest pace in decades. For years, central bank purchases averaged between 400 to 600 tons annually. But since 2022, the central bank buying gold has crossed about 1,000 tons per year. And they're doing it for a simple reason. The central banks want to make their reserves less dependent on the US dollar. Gold helps them diversify with no counterparty risk, and gold acts as a hedge against inflation. Unlike bonds and currencies, gold does not depend on another country's promise to pay. It simply holds value on its own.
And we can see the result of that central bank buying here. Back in 2021, gold made up only about 13% of central bank reserves, while US debt holdings were nearly double of that at 28%. But by 2025, that gap has nearly disappeared. Gold now represents about 24% of the central bank's reserves, overtaking the US debt holdings. We can see governments are slowly reducing their reliance on the dollar assets and increasing exposure to gold instead. Gold is now being seen as a neutral asset among countries and is a preferred hedge against currency volatility and geopolitical risks. Therefore, central banks buying is creating a long-term structural demand for gold.
So gold's rally today doesn't necessarily mean the economy is breaking, but it does reflect a broader shift in how investors and central banks are positioning in a world with rising debt and abundant liquidity. And that could be why gold is once again taking a larger share of the monetary system. At capital.com, we'll keep tracking what moves in gold mean for markets and investors. Thanks for watching.